At first, a reverse mortgage sounds like a great idea, but you or your parent(s) may actually be falling for a scam.
The housing market is bad right now and rather than try to sell your house, a reverse mortgage (selling your house to the bank) seems attractive to most; what you’re not seeing is that many mortgage companies will pay you a monthly amount that doesn’t begin to add up to the real worth.
You spend your life trying to pay off your mortgage, and just when you do, some shady con-artist is there ready to take your home and more using a reverse mortgage. Some of the safest reverse mortgages are HUD/FHA reverse mortgages, but in general, it’s better to focus on 401k planning and long term retirement rather than wait and attempt a reverse mortgage.
Reverse Mortgage
Reverse Mortgages are one of the lesser known forms of home equity borrowing and is a specialized type of home equity loan designed specifically to allow senior citizens to turn their home equity into cash without having to make monthly loan payments.Why are these type of mortgages so popular and why is the number growing? Many seniors have homes with little or no mortgage, yet struggle to meet daily living expenses. These are referred to as “house rich, cash poor” households and that is exactly what a reverse mortgages was designed for.
The best way to understand the workings of a reverse mortgage is to contrast it with a regular (or “forward”) mortgage. There are two main reasons for the name reverse mortgage:
- First, the monthly payment relationship between lender and borrower is reversed. With a conventional loan, the borrower (you) makes monthly payments to a bank or other lender. Contrast this with a reverse mortgage where the bank makes monthly payments to you.
- Second, with a conventional mortgage you pay off the debt over the term of the loan. As you make payments, the amount of your debt decreases and the amount of your home equity increases. With a reverse mortgage, the reverse occurs: your debt goes up and your home equity goes down.
Disadvantage of a Reverse Mortgage
A Home Equity Credit Mortgage (HECM) has three primary advantages for “house rich, cash poor” seniors:- There are no monthly loan payments required. Instead of you repaying the bank, the bank makes a payment to you each month.
- The reverse mortgage loan is good for as long as you own your home – even for the rest of your life. Further, you can never owe more than the value of your home. No matter how long you live or how much the loan payments to you total, the most that will ever have to be paid back is the amount your home can be sold for.
- Since there are no monthly payments, you do not need to show an ability to repay the loan. The only requirement is that you own your home free and clear. If there is an existing mortgage, it will have to be paid off with proceeds from the reverse mortgage
Advantage of a Reverse Mortgage
So why aren’t reverse mortgages more popular among senior citizens?The most important factor is high fees. Reverse mortgage origination fees can be very steep. For example, the benefit of never having to repay more than the value of the home comes at a cost: special insurance premiums be paid at closing and throughout the life of the loan. Origination fees can be financed as part of the overall loan package, but many seniors still see the fees as excessive, especially when compared to other forms of home equity borrowing that have very low costs.
Finally, reverse mortgages are difficult to understand, especially for elderly people who have grown accustomed to making regular mortgage payments and who have finally paid off their mortgages. The notion of taking on additional debt to meet living expenses (reverse Mortgage) runs counter to the personal finance values that most people live their lives by.
Despite the disadvantages, reverse mortgages may grow fast among senior citizens in the coming years. The Baby Boom generation is nearing retirement and it’s no secret that many have not saved enough. The biggest asset that most people approaching retirement have is the equity in their homes. Turning this equity into a retirement income stream will be important for many household and reverse mortgages are one of the best tools for doing this.
HECM
Below are some additional info on the Reverse Mortgage or Home Equity Conversion Mortgage. Reverse Mortgage is commonly mispelled Reverse Mortage so if you’re searching for Reverse Mortgage Information, you’ll find that your results are limited or may be inaccurate.- A special type of loan available to equity-rich, older owners. Repayment is not necessary until the borrower sells the property or moves into a retirement community.
- federally insured reverse mortgage is a reverse mortgage guaranteed by the federal government so you will always get what the loan promises; also, a Home Equity Conversion Mortgage (HECM).
- a proprietary reverse mortgage is a loan owned by a private company.
- A tax-free loan for home owners whose mortgage is paid in full, but want to use the equity in their home.
- A financial tool that provides seniors with funds from the equity in their homes. Generally, no payments are made on a reverse mortgage until the borrower moves or the property is sold. The final repayment obligation is designed to not exceed the proceeds from the sale of the home.
- a form of mortgage in which the lender makes periodic payments to the borrower using the borrower’s equity in the home as security. A Special type of loan made to older homeowners to enable them to convert the equity in their home to cash to finance other needs.
- Rather than paying into a mortgage, certain qualified homeowners can tap into their equity for retirement support using a reverse mortgage.
- A home loan that gives cash advances to a homeowner, requires no repayment until a future time, and is capped by the value of the home when the loan is repaid
- A reverse mortgage (also known as equity withdrawal) is a type of loan used by older consumers as a way of converting their home equity (the value of their home, minus the amount of mortgage(s)) into a cash payment (or series of payments) while retaining ownership of their property.
To qualify for a reverse mortgage in the United States, you must be at least 62 and have paid off all or most of your home mortgage.
